Investing in Shares for Children: Common Misconceptions and Tax Facts
- Angelina Anderson
- Aug 1
- 6 min read
Updated: Aug 4
Investing in shares for your children or grandchildren can be a great way to kick-start their financial future. Many Australian families want to set aside shares for education, a first home, or simply to teach their kids about investing from an early age. However, there are some common misconceptions about how these investments are taxed and who is legally responsible. It’s important to understand the tax rules and structure things correctly; otherwise, you could face unexpected tax bills. In this post, we’ll explain how the Australian Taxation Office (ATO) treats children’s share investments, debunk a few myths, and offer practical tips for investing for kids in a legal and tax-efficient way.
How the ATO Treats Children’s Investment Income
The ATO has special rules for minors (under 18) who earn investment income like dividends or capital gains. Unlike adults, children do not get the normal $18,200 tax-free threshold for “unearned” income (income from investments, not wages).
In fact, the tax-free threshold for minors’ investment earnings is only $416 per year, and any income above that is taxed at punitive rates to discourage parents from diverting income to. For example, between $417 and $1,307 of investment income, 66% of the excess is taxed, and beyond $1,307, the entire amount is taxed at 45%. These high rates can quickly erode any returns if you simply put investments in a child’s name, hoping to save tax.
Because of these rules, if your child earns more than $416 from shares in a year (for instance, from dividends or profit on selling shares), you are required to lodge a tax return for them. Even if the amount is $416 or less, a tax return may still be needed to claim back any tax withheld or franking credits. The key point is: children are not entitled to the full adult tax-free threshold on investment income, and in some cases, their income can even be taxed at the highest marginal rate. This often surprises parents who assumed their child could use an adult’s tax thresholds.
Legal vs Beneficial Ownership: Who Owns the Shares?
Another important concept is legal ownership versus beneficial ownership of shares. Just because shares are bought in a child’s name doesn’t automatically mean the child is considered the owner for tax purposes. The ATO looks at who provided the money, who makes the investment decisions, and who benefits from the income to determine who the “real” owner is. In general, if a parent or grandparent is holding shares on behalf of a child, the adult will be treated as the owner (and taxed on the income) unless the child is genuinely the beneficial owner.
Genuine beneficial owner (the child): This usually means the investment was funded by the child’s own money (e.g. birthday gifts that were genuinely given to the child, or earnings from a part-time job that the child chose to invest) and the dividends or proceeds are used for the child’s benefit. In such cases, the child is the beneficial owner and the income should be declared in the child’s tax return. Keep in mind the special minor tax rates will apply to that income in the child’s return as discussed above.
Not the beneficial owner (the parent/grandparent): If the parent or grandparent provided the money and essentially treats the shares and income as their own (for example, using the dividends themselves or making all decisions without regard to the child), then the adult is the one who must declare any dividends or capital gains on their tax return. In the ATO’s eyes, the adult is just using the child’s name, but the adult is the real owner of the investment.
Case in point: The ATO gives an example of a father who withdrew $3,000 of his own money to buy shares in his young daughter’s name. He listed his own Tax File Number (TFN) on the account and had the $200 in dividends paid into his account for personal use. In this scenario, the father is treated as the owner and must declare the $200 dividend on his own tax return, and later any capital gains when the shares are sold. Simply putting the shares under the child’s name did not shift the tax responsibility to the child because the child wasn’t the true owner economically.
Debunking Common Misconceptions
Myth 1: “Children get a tax-free threshold on investment income just like adults.”
Fact: Not true for most cases. As noted, except in special circumstances, minors don’t enjoy the standard $18,200 tax-free threshold on investment earnings. They only get a very small tax-free amount (up to $416), after which penalty tax rates apply. This is designed to prevent parents from avoiding tax by putting investments in their child’s name. Unless the child is an “excepted person” (for example, a child who works full-time or has a disability pension) or the income is from excepted sources (such as a deceased estate or compensation), the minor’s unearned income will face these higher tax rates. In short, you can’t assume a child can earn lots of interest or dividends tax-free – the ATO will tax most of it heavily.
Myth 2: “If I gift shares to my kids or grandkids, neither of us pays tax on the transfer.”
Fact: Gifting shares triggers tax consequences. Australia may not have a specific “gift tax”, but when you transfer shares (or other investments) to a family member, it is treated as a sale for market value and triggers a capital gains tax (CGT) event. In other words, even if no money changes hands, the ATO assumes you “sold” the shares to your child at the current market price. If those shares have gone up in value since you bought them, you, the giver, will have to declare a capital gain in your tax return for that year and pay any CGT due on that gain. The child receiving the shares will take the shares with a cost base equal to the market value at transfer. This often catches people by surprise – they think a gift is tax-free, but with shares, the giver may end up with a tax bill on unrealised profits. (One small consolation: if the shares have dropped in value, you could register a capital loss, which might help offset other gains.) The key message is: gifting shares or investments is not a way to avoid tax. You either pay CGT on the transfer now, or someone will pay it later when the asset is eventually sold.
How Dolman Bateman Can Help
Navigating the tax rules around investing for children can be confusing; there are different treatments depending on who owns the asset, how the money was provided, and how the income is used. Misconceptions abound, and as we’ve shown, a well-meaning plan to save tax by putting assets in a child’s name can backfire without proper planning. At Dolman Bateman, our Chartered Accountants help parents and grandparents understand these rules in plain language and structure family investments the right way. We can assist with questions like:
Should I invest in my name or the child’s name (or via a trust)?
What are the tax implications if I transfer this asset to my kids now versus later?
How can I legally minimise the tax on investment earnings meant for my child’s future?
What records and returns do I need to keep on top of if I start a portfolio for my child?
Are there alternative investment choices (like trusts or bonds) that suit my family’s goals?
Our goal is to help you support your children’s financial future in the most tax-effective and compliant manner. Every family’s situation is different; the best approach for you will depend on your income, the amounts involved, and your long-term intentions. With professional advice, you can avoid the common pitfalls and confidently invest for your kids or grandkids, knowing you won’t run afoul of the ATO. If you have questions or need guidance on setting up an investment plan for a minor, feel free to contact Dolman Bateman. We’re here to help you make informed decisions and navigate the rules so that your generosity truly pays off for your family.
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Disclaimer:
The information provided in this article is general in nature and does not constitute personal financial, legal or tax advice. While every effort has been made to ensure the accuracy of this content at the time of publication, tax laws and regulations may change, and individual circumstances vary. Dolman Bateman accepts no responsibility or liability for any loss or damage incurred as a result of acting on or relying upon any of the information contained herein. You should seek professional advice tailored to your specific situation before making any financial or tax decision.
